PASSIVE FOREIGN INVESTMENT COMPANY (PFIC) / FORM 8621
What are PFICs?
PFICs, or Passive Foreign Investment Companies, are coming more into the spotlight within the US Expatriate Tax arena. There are countless articles and blogs that go into the explanation of what exactly constitutes a PFIC – but the rule of thumb is that if you are a US taxpayer, and hold a non-US investment account, the funds, ETFs, and other such “pooled” investments are probably PFICs. This applies to accounts not taxable in the host country (for example, UK ISAs, Swiss 3A pillar accounts, and the likes), and possibly to certain pensions that qualify as Foreign Grantor Trusts. Each underlying investment is a PFIC onto itself, i.e., the account itself is not one PFIC – but rather the contents within. An important note is that shares in “active” companies are not PFICs. As such, if you hold stock in Nestle, for instance, you would not be triggering the PFIC requirements with this investment.
What are PFIC reporting requirements?
The reporting requirements can be very complex for PFICs. Each PFIC requires reporting on Form 8621. On this form, you disclose the fund particulars such as name, address, location of management, as well as year-end holding information pertinent to you, the shareholder. You may also make various elections on the form, which changes how the PFIC is taxed on the US return.
How are PFICs taxed by the US?
The default regime is the 1291 regime. Complex formulas are computed (the details may be located on the Form 8621 instructions), that give a result of around 40% tax on distributions and gains. If a fund is purely accumulating (no dividends paid out, even as reinvestments) and there are no unit sales, there is no tax. However – there is no avoiding the 40% tax upon cash out. Interest is calculated over the holding period, so normally the longer a fund is held the more PFIC tax is incurred. We normally advise to make elections to exit the 1291 regime as soon as possible to minimize the tax exposure. However, everyone’s situations are different and other factors must be taken into consideration before making elections. Our team will be able to better advise.
This election is allowed on timely filed returns and allows a PFIC holder to opt out of the 1291 regime. Instead, the taxpayer calculates the growth in the fund, and adds that as income on his or her tax return for the year. The downside is that this income is unrealized – meaning it was not actually paid out. However, the income is taxed at ordinary rates on the return, and the basis in the fund is adjusted up. This produces overall tax savings for most.
Why choose Zisman US Tax to help with your PFIC situation?
We are PFIC experts who have been preparing PFIC forms and providing PFIC advice for over 15 years. We do not only prepare the forms and run calculations, but we also thoroughly understand the work, and are happy to explain the working of these investments, as well as provide tax advice to help minimize tax exposure in the future, based on the taxpayer’s unique circumstances.
We are a boutique online firm with minimal overhead costs, thereby allowing us to provide competitive PFIC pricing. The initial year, we charge $125 per PFIC Form 8621 that requires calculations and $75 per informational PFIC Form 8621. The second year onward, we charge $50 per PFIC Form 8621
We provide expat tax services to expats around the world. To learn more about how we can help you, contact us.
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